Is China killing its golden tech goose?
Good morning. Over the weekend, U.S. Deputy Secretary of State Wendy Sherman met with Chinese officials including Foreign Minister Wang Yi in the port city of Tianjin. The stated aim was to put "guardrails" around a rapidly cratering bilateral relationship. That goal was evidently not achieved, with Sherman insisting that human rights "are not just an internal matter" and counterparts like Vice Foreign Minister Xie Feng accusing the U.S. of trying to cast China as an "imaginary enemy."
In this week's Protocol | China: e-CNY surveillance, a SHEIN return to India, and a war for Chinese EV talent.
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The Big Story
China's tech crackdown
Chinese authorities' spirited regulation of the country's tech industry have raised questions about its future, and the country's. Over the medium and long term, will bureaucrats drive tech into the ground and meaningfully hamper the economy's ability to grow? It's particularly relevant after authorities over the weekend announced the forced conversion of once-lucrative online-education companies into nonprofits, a move with predictably devastating consequences for Chinese ed-tech stocks.
Spoiler: We don't know, you don't know and Beijing doesn't know (though we hope it has a good guess). But it's important to think through the implications.
Starry-eyed entrepreneurs could decide being a successful tech founder isn't worth the trouble. If they do, en masse, it could have a real effect on the country's ability to author next-generation innovations.
- Call this the Jack Ma effect: Alibaba founder Ma, once a veritable rock star, is now a "capitalist running dog" and a punching bag for authorities and netizens. (Then again, Ma's still awfully rich, and he has his freedom. All those riches might be worth the trouble.)
- On the other hand, an activist antitrust regulator opens pathways to new entrants — an argument that's being made in the U.S., too. It's no longer inconceivable for an upstart with fresh ideas to think it could eventually challenge DiDi or Alibaba, companies that five years ago looked unassailable.
- It's unclear that would-be entrepreneurs will exit the game. Alternatives to working in tech are also politicized, from education to media to (obviously) the seemingly safe haven of government. Chinese entrepreneurs aren't that different from American ones in that regard: Many choose the path simply because they can't picture themselves working for someone else.
One major factor: the continued prominence of state-owned enterprises. They still account for nearly a third of the country's economic production, and ruler Xi Jinping has said he wants them to remain the core of China's economy and drive innovation.
- From Beijing's perspective, state-owned firms are easier to control. They can also blunt economic shocks by ensuring continuous employment in what is, after all, still a communist country.
- But they are markedly less efficient than private firms. Will major next-gen talents want to join SOEs — and be able to make the same types of technological and product breakthroughs they've made over the past 10 years in the private sector?
And GDP isn't everything. Some of the pushback against Big Tech involves blunting genuinely shady practices that have hurt and frustrated consumers and small businesses.
- Big Tech did things that consumers anywhere would consider outrageous, like charging higher prices to more-loyal customers. There are social benefits to consider beyond the top-line numbers.
- But the impact on growth still matters. China has the very real chance to surpass the U.S. in aggregate GDP in another 10 years or so, giving it even more profound global influence. And it needs to get rich enough to avoid a looming (and mostly self-imposed) shrinking in its working-age population.
So what are regulators thinking? Because China's rule-making isn't transparent, it's unclear if regulators are gaming out GDP losses versus just reacting to consumer complaints. It appears to be more of the latter.
On Protocol | China
- Who should be scared of China's big, bad digital yuan? China's the first major economy to launch a centrally-backed digital currency. With its well-known penchant for surveillance, can users trust the government not to use the e-CNY to peer into their intimate habits? Zeyi Yang has the experts' take.
- How China's culture of overwork came crashing down. After years of (mostly bottled-up) worker discontent at Big Tech's punishing "996" schedule — 9 a.m. to 9 p.m., six days a week — anger at grueling hours has bubbled over the past two years, leading to a recent slate of announcements that companies would adopt more employee-friendly practices. Shen Lu explains how China's era of Big Tech Overtime is finally ending.
- China's web users are writing a new playbook for disaster response. In the face of deadly flooding in Henan province, Chinese web users repurposed Weibo and Tencent spreadsheets to share medical and rescue information and even tell people displaced by the flooding where to find phone charging stations. The grassroots response offers broad lessons in how to cope with the ravages of climate change. Shen Lu has more.
A MESSAGE FROM TRELLO
After a year and a half of living and working through a pandemic, it's no surprise that employees are sending out stress signals at record rates. According to a 2021 study by Indeed, 52% of employees today say they feel burnt out. Crisis management is one thing, but how do you permanently lower the temperature so your teams can recover sustainably?
China Goes Global
- SHEIN returns to India. Among over 200 Chinese apps banned by the Indian government last year, SHEIN is the second one to have figured out a way to return to the Indian market. (The first is the popular mobile game PUBG). According to Chinese outlet Chuhai Post, SHEIN chose to sell through Amazon in India, instead of on its own website and app, which it does everywhere else. This is probably a win-win for Amazon and SHEIN, although there are still potential threats: Amazon itself is undergoing an antitrust investigation in India right now.
- YT Jia is global, and not going home anytime soon. After the notorious bankruptcy of his entertainment/streaming empire Leshi, Chinese entrepreneur Jia Yueting (or YT Jia, as he's known) has avoided returning to China for over three years, where he still has billions of RMB worth of outstanding debts. But it's remarkable how he keeps attracting new investors, now to his latest venture: Faraday Future, a California-based electric vehicle company. On Thursday, Faraday Future went public on Nasdaq through a SPAC deal; its stock price has dipped about 30% since. So far, the company has not delivered a single car to any customer, but the first batch may come out in 2022, reported Chinese tech outlet PingWest.
Big Brother Beijing
- Regulators send ed tech to detention. China's once white-hot ed-tech sector has become the latest industry to face a serious government crackdown. On Saturday, Beijing issued policy guidelines that mandate private tutoring companies register as nonprofit organizations. Online tutoring agencies will also be subject to regulatory approval. The announcement caused major Chinese ed-tech companies' stocks to plunge. Regulators have laid their eyes on this sector for a while now; read more here about the tightened regulatory oversight on ed tech that's been ratcheting up since January.
- The government issues new rules to protect gig workers. The plight of food-delivery workers in China has been in the national spotlight since last summer. On Monday, seven Chinese central government agencies issued a set of policy guidelines (technically, "opinions") that urge tech companies and local governments to ensure labor rights for gig workers, including paying at or above the local minimum wage and allowing them to access social security benefits.
- Beijing clears the highway for self-driving cars. On Tuesday, the municipal government of Beijing permitted four companies including Baidu, Pony.ai and JD to test their self-driving cars or trucks on the highway. For now, they are still limited to a 10-kilometer stretch of the Beijing-Taipei Expressway, reported BJ News, but the city government plans to eventually open six different highways, totaling 143 kilometers (88 miles) in length, to support the development of self-driving cars.
On Our Radar
- China's phone makers race to develop their own chips. After Xiaomi released its self-developed image signal processing chip, the Surge C1, it was reported that two other Chinese smartphone makers, VIVO and OPPO, have also invested in developing their own image processing chips. The two firms are planning to unveil their self-designed chips when they release their new phone models later this year and next year, respectively.
- Red's on a collision course with Taobao ... and maybe Beijing. After suspending its U.S. IPO, Xiaohongshu ("Red"), the Chinese breakout social media platform, is doing some serious soul-searching. According to Chinese tech outlet Xinkedu, starting in August, Xiaohongshu will ban hyperlinking to the Alibaba-owned Taobao within its service in order to support its own ecommerce ambitions. In other words, the lifestyle-sharing app doesn't just want to market style; it wants to sell actual products and make real money. This is a bold move, and one that could pit Xiaohongshu against Alibaba. It could also catch the eye of market regulators, who now view link-blocking as an antitrust violation.
- Behind the business of going viral. There's good news if you want to be on Weibo's trending charts: all you need is money. While the social platform's trending hashtags are often used by the media and academics as quantitative proof of virality, there's actually a mature industry selling access to any spot on the chart, reported Chinese media Caijing. You can buy a sponsored spot directly from Weibo — it's $215,000 for the third-hottest hashtag, for example — or you can make it seem more natural by paying savvy marketing companies to push your hashtag into the mainstream.
- China's cloud computing market grew by 56.6% year-over-year in 2020, according to a white paper released by the China Academy of Information and Communications Technology, a government think tank under the powerful Ministry of Industry and Information Technology. The growth was most sizable for public cloud computing (85% year-over-year), infrastructure as a service (98%), and platform as a service markets (145%). China's 209 billion yuan (roughly $30 billion) cloud market is still only about 15% of the global total, but is growing rapidly. The white paper predicts that by the end of the 14th Five-Year Plan in 2025, the Chinese cloud market will exceed 1 trillion RMB, or about $150 billion.
One More Thing
A war for EV talent breaks out
As Protocol | China's Shen Lu previously wrote, the electric vehicle market in China is taking off, and everyone wants a piece. Tech outlet 36Kr reported last Thursday that competition for automobile talent is keen among China's many wannabe EV makers, with smartphone maker Xiaomi authorizing an annual salary of up to 20 million RMB, or about $3 million, for a single EV-related position. Additionally, the night before DiDi opened up a car manufacturing position, researchers at Li Xiang, an Alibaba-aligned car company, reportedly worked late into the night to hammer out a non-compete agreement so they wouldn't be poached when the sun came up the next morning.